What to pay back first??

jls022

Hello eveyone,

I am looking for some advice please. I have a £9000 loan that I took out for a car (a personal graduate loan was cheaper than car finance) and a £1000 interest free graduate overdraft. I was recently given a bonus of about £750 after tax at work and I would like to use it to start reducing my debts so I can afford to get my own place within the next couple of years.

What i am wondering is what to pay off first? My loan has no penalty for making early repayments so I could do that but I think I still pay interest on the original loan amount until the loan is paid off. This means the loan will be paid off earlier but I will still be paying more interest than I should so I don't think this sounds the best idea?

I then thought about saving the money in a high interest savings account and making regular payments until I could afford to pay off the whole loan at once. However, I only have about 6 months left until they start charging me for my overdraft (terms of the graduate account), so do you think it would be worthwhile just paying that back now so it is out of the way?

I would really appreciate the advice of someone who understands this a bit better than me

Thanks

immoral_angeluk

Can you list all of the debts you have, what is owed, what the limits are and also the APR?

jls022

Yes I have £9000 left on the loan (as per internet banking, before interest) at 11.5% APR and £1000 overdraft at 0%.

immoral_angeluk

How long is your overdraft at 0% and is there a monthly charge for it?
Any overpayment or early repayment charges on the loan? Are you actually allowed to overpay on it?

jls022

No there is no monthly charge for it, but I only have 6 months left before they do start charging me (you get it interest free for 3 years after graduation).

I am allowed to make repayments on the loan, but the paperwork says that I will still be charged interest on the full amount until the loan is paid off. The loan will be paid off earlier in this case though.

Thanks for replying btw

immoral_angeluk

What will the APR be on the overdraft when that kicks in? How much could you feasibly and realistically afford to pay off in the next 6 months?

ecoelle

I would say that if you are going to pay the same amount of interest on your car loan regardless of when you pay it off then i would put the money into an ISA for 6 months until your iverdraft becomes none free of charge, by this point you may have been able to pay off some of your overdraft anyway, and then using the money from the ISA pay off the rest. If you are 1000 overdrawn and the largest OD for students is 3000 (i think), then you must be able to pay off about 500 over the next 6 months so the 750 plus any interest it earns should put you into the black.

jls022

Thanks ecoelle, I keep getting conflicting advice from my friends/family re saving when you have debts etc which is really confusing me. Immoral_angeluk, I am not totally sure how much the overdraft charges will be on the OD, I am trying to find out at the minute and will post back later when I find out.

DarkConvict

I would use the money to towards the car loan.

The car loan is costing you 11.9% a year.

An ISA at 2.5% is (3.12% basic rate,4.16% higher rate). So even a top 3.5% ISA is less than 11.9% taking into account tax. As such you loose money by savings rather than paying of debts.